State and federal regulators in the US are intensifying their scrutiny of insurance companies owned by billionaire Mark Walter, including Guggenheim Partners and other private equity-backed insurers. This heightened focus comes amid concerns about how these firms are disclosing their assets and the potential risks posed by their substantial investments in illiquid private credit. Regulators are particularly interested in whether these investments are adequately valued and how they impact the insurers' ability to meet their policyholder obligations.
Regulators are examining whether these firms are properly valuing assets and holding sufficient capital reserves. This inquiry is part of a broader industry trend where insurers, especially those linked with private equity or alternative asset managers like Blackstone and Apollo Global Management, have significantly increased their allocation to private credit, now accounting for nearly one-third of their $5.6 trillion in total assets. The opaque nature of these investments, often held through offshore or captive reinsurance subsidiaries, makes it difficult for regulators to assess their true risk and solvency.
Several news sources highlight industry-wide concerns about private credit investments, with U.S. life insurers holding an estimated $1.6 trillion in 2023, potentially reaching $2 trillion by the end of 2024. This rapid growth, coupled with the lack of secondary market prices for private credit, creates challenges for regulators in understanding the credit metrics and potential losses. The National Association of Insurance Commissioners (NAIC) has introduced Actuarial Guideline 55 to require more robust cash-flow testing for these assets, acknowledging the difficulty in obtaining transparent financial information from offshore entities.
Moreover, some insurers are exploiting rating loopholes by securing private credit ratings from non-standard agencies to reclassify assets as lower-risk, thereby reducing required capital buffers. This practice, estimated to reduce required capital by $3 billion across the sector, allows insurers to free up capital for dividend payouts and new business but erodes the regulatory safety net. Forensic accountants and other critics question the adequacy of collateral held by captive and offshore reinsurers for policyholder claims and the overall transparency of these arrangements, with an estimated $1.3 trillion in liabilities transferred offshore. Meanwhile, PE-backed insurers have ceded risk to affiliated insurers equivalent to nearly half of their total assets, or $400 billion, by the end of 2023, compared to less than 10% for other U.S. life insurers, raising concerns about potential harm to consumers in the event of an economic downturn.
